November, 1999Stephen H. Cypen, Esq., Editor
1. WEALTHIEST ZIP CODES CHANGE...SLIGHTLY: The top five zip codes in Florida, ranked by 1998 per capita income, are as follows: 33480 (Palm Beach) - $53,296.00; 33149 (Key Biscayne) - $42,845.00; 33156 (Coral Gables/Pinecrest) - $38,148.00; 33483 (Gulf Stream) - $37,653.00; and 33131 (Miami/Brickell) - $37,032.00. In our last report on the subject (see C&C Newsletter for May, 1998, Page 2), we suspect there was a typographical error in our report or in the source, because number 1 Palm Beach showed 1997 per capita income of $74,765.00. Incidentally, last year's number 4 (33496-Boca Raton) and number 5 (33154-Surfside/Bal Harbour/Bay Harbor Islands/Indian Creek) fell to 14 and 8, respectively.
2. BIG SHAKE-UP IN DOW: While we have been reporting on how changeable the S&P 500 is (see C&C Newsletter for September, 1999, Item 5), it has been over two years since there has been any change in the Dow Jones Industrial Average (see C&C Newsletter for March, 1997, Page 2 and C&C Newsletter for April, 1997, Page 1). Gone are Chevron, Goodyear, Sears and Union Carbide, all of which joined the 30-stock index before 1931. The replacements are Home Depot, Intel, Microsoft and SBC Communications. Of the original Dow Jones stocks (there were twelve, starting in 1896), only General Electric remains. Also, until now, all Dow stocks had come from the 207-year-old New York Stock Exchange. The addition of Intel and Microsoft marks the first time stocks of the 18-year-old Nasdaq Stock Market are included. Incidentally, as our readers know, the Dow utilizes a special divisor to reduce distortions when companies split or when there are substitutions. If you have nothing else to do, add up the prices of all thirty stocks and divide the total by .19740463. And when you're done with that exercise, get a life.
3. MEANWHILE, NASDAQ MAKES HISTORY: The Nasdaq composite index, which measures performance of large and small issues traded on the Nasdaq Stock Market, made history on November 2, 1999 when it passed the 3,000 point level for the first time. The technology-heavy Nasdaq took less than sixteen months to gain 1,000 points, having crossed the 2,000 mark on July 16, 1998. Besides Microsoft and Intel, some of Nasdaq's biggest names include Cisco Systems, MCI WorldCom, Dell Computer, Sun Microsystems and Oracle.
4. AMERICANS FAULTED ON SAVINGS: Mounting credit card debt, poor savings habits and misinformation about the benefits of long-term investing are jeopardizing millions of Americans' chances for a comfortable retirement, according to a study by the Consumer Federation of America and Primerica. Despite a booming economy, the typical household's consumer debts total more than half its assets and half of all U.S. households have less than $1,000.00 in ready assets. The spending habits of most Americans are so bad that the personal savings rate has actually dropped below zero this year. For the first time since the Great Depression, American families are spending more disposable income than they are earning, dipping into their savings to do so. Even workers with pensions aren't saving enough: half of those with 401(k) retirement plans have less than $12,000.00 in savings. And those who expect Social Security to make up the difference will be sadly disappointed when retirement rolls around because Social Security benefits will provide only 15% to 30% of the money needed for a comfortable retirement.
"Never put off until tomorrow what you can put off for good."
5. FEC MAY ENTER PAY-TO-PLAY FRAY: According to a report from the National Conference on Public Employee Retirement Systems, the Federal Election Commission may ask the Securities and Exchange Commission to refrain from adopting a new rule on pay-to-play practices. At least one FEC Commissioner believes that FEC has exclusive jurisdiction over regulation of contributions to federal candidates. The proposed SEC rule (see C&C Newsletter for October, 1999, Item 5) would limit political contributions in the financial industry to $250.00 for all candidates, including those running for federal office. Currently, individual contributions are limited to $1,000.00 for federal candidates.
6. AMERICANS INVEST HEAVILY IN EQUITIES: A study from the Investment Company Institute (which represents the mutual fund industry) and the Securities Industries Association (which represents the securities industry) indicates that nearly half of American households own equities, either in mutual funds or individually. The survey also notes that 32% own equities through employer-sponsored retirement plans and 35% own them outside such plans. Incidentally, the mutual fund industry has done a remarkable job in broadening its business and in getting Americans involved in a capitalistic system. In the early 1980's, equity assets were about $50 Billion and there were 350 equity mutual funds. By 1988 the number of equity funds had jumped to more than 1,000, with assets of almost $200 Billion. As of the end of last year, the assets of equity funds totalled roughly $3 Trillion being managed by over 3,500 funds. Overall, the total mutual fund industry has $5.5 Trillion in assets with some 7,500 funds.
7. RECENT BULL MARKET MAY LEAD TO UNREALISTIC INVESTOR EXPECTATIONS: Stock market returns since 1926 have averaged an annual 11.2%. Annual returns the last 20 years and 10 years have averaged 17.8% and 19.2%, respectively. Most investors have never experienced a bear market -- defined as a 20% drop from high to low in the popular stock market averages. Our booming economy will probably not last forever. Markets like the 1930's (-0.1%), 1960's (7.8%) and 1970's (5.9%) could recur if the economy turns sour. (Surprisingly, at an average annual return of 19.4%, the 1950's was the best decade.) Even the best decades had at least one pretty bad year: 1957 (-10.78%), 1981 (-4.91%) and 1990 (-3.17%). As one expert sums it up, given the dramatic returns over the last two decades, investors must again become accustomed to more reasonable performance in the future.
"No sense being pessimistic; it wouldn't work anyway."
8. AN INTRODUCTION TO ACTUARIAL COST METHODS: There are seven widely recognized methods of determining the annual contribution to a defined benefit pension plan. The Individual Aggregate method requires that individual contribution requirements be determined for each participant and then added together to equal the total contribution obligation of the entire plan -- generally used in "small" plans. The Aggregate method is similar to the Individual Aggregate method, except that the present value of future benefits is determined for each individual and then combined before being amortized. The Entry Age Normal method assumes that contributions began when the participant was hired, even if entry into the plan did not occur until many years later -- a procedure similar to the Individual Aggregate method. The Frozen Initial Liability method combines the characteristics of the Aggregate method and the Entry Age Normal method -- basically the Aggregate method with a past service liability. The Unit Credit method is not a projected benefit method like the foregoing methods, but rather is an accrued benefit method -- normal cost is determined using only the current increment of benefit earned during the current year of service. Two other actuarial funding methods, the Attained Age Normal and Individual Level Premium methods, are not widely employed, although the latter is used to determine contribution allocations in target benefit plans.
9. P&F CONFERENCE APPLAUDED: So what else is new? As with the previous thirty, the 31st Annual Police Officers' and Firefighters' Pension Trustees' Conference held on October 25 through October 27, 1999 at the Hilton Hotel in St. Petersburg was excellent. Again we congratulate and thank Andy McMullian, David Jones, Trish Shoemaker, Keith Brinkman, Betty Allen and Melody Mitchell. We don't know what we would do without you.
10. CUSTODIANS SURVEYED: Plan Sponsor has released the results of the Ninth Annual Survey of Worldwide Custody Services conducted by its sister publication, Global Custodian. Ranked by total assets, the top ten are Bank of New York, Chase Manhattan, State Street, Citibank, Mellon Trust, Bankers Trust, Deutsch Bank, Northern Trust, Credit Suisse and Royal Trust. The 1999 survey follows the approach adopted for the first time last year (see C&C Newsletter for November, 1998, Item 13). This survey also ranks custodians based on client service, securities lending, client reporting, performance measurement and risk management.
11. PUBLIC EMPLOYERS NOT REQUIRED TO BARGAIN OVER RIGHT TO SUBCONTRACT: Section 447.209, Florida Statutes, provides that it is the right of a public employer to determine unilaterally the purpose of each of its constituent agencies, set standards of services to be offered to the public, and exercise control and discretion over its organization and operations. A Florida appellate court held that the Public Employees Relations Commission properly interpreted that section as not requiring public employers to bargain collectively over the right to subcontract. The right to subcontract is a management prerogative that is not the subject of mandatory collective bargaining. A United States Supreme Court decision holding that in the private sector subcontracting is a mandatory subject of collective bargaining is distinguishable in that private sector employers are quite different from public sector employers. The Florida Supreme Court has previously recognized that there are critical distinctions between private and public sector bargaining. Amalgamated Transit Union, Local 1593 v. Hillsborough Area Regional Transit Authority, 24 Fla. L. Weekly D1998 (Fla. 1st DCA, August 25, 1999).
12. PRIVATE ENTITY PERFORMING GOVERNMENTAL FUNCTION IS SUBJECT TO FLORIDA PUBLIC RECORDS ACT: Sections 828.03 and 828.073, Florida Statutes, authorize any society or association for the prevention of cruelty to animals to investigate violations of laws protecting animals or preventing any act of cruelty thereto. An agent of any such society or association may lawfully take custody of any animal found neglected or order the owner of any such animal to provide certain care at the owner's expense. Although said statutes authorize the humane society but do not compel it to perform a governmental function, the difference is immaterial once the society assumes authority under the statutes. Therefore, the society must make available records that were created and maintained in connection with the acts of its functions pursuant to the statutes. Putnam County Humane Society, Inc. v. Woodward, 24 Fla. L. Weekly D2006 (Fla. 5th DCA, August 27, 1999).
13. BUCK ISSUES STUDY ON RETIREMENT PLAN DISCLOSURES: Buck Consultants, Inc. has issued a new study of the Pension Disclosures (FAS 87 as amended by FAS 132) in the 1998 annual reports to shareholders of 552 Fortune 1000 companies. The average funding ratio, based on the projected benefit obligation, was 107% at the end of 1998 compared to 111% at the end of 1997. The average discount rate used for disclosure purposes decreased from 6.77% in 1998 from 7.23% in 1997. The average expected long-term rate of return on plan assets increased to 9.11% in 1998 from 9.10% in 1997. And the weighted average of salary increase assumptions decreased to 4.54% in 1998 from 4.69% in 1997.
14. MUSICAL PROVIDERS: According to the 1999 BARRA Rogers Casey/IOMA Annual Defined Contributions Survey, 40% of all plan sponsors fired at least one provider during the past year and 37% anticipate hiring at least one new provider in the next year. Investment Managers fared worst, with 22% of sponsors firing at least one in the past year, followed by record keepers (21%), trustees (17%), consultants (5%) and independent providers of investment advice (3%). And the trend is rising: in 1997 only 27% of respondents had axed a supplier versus 34% in 1998. One reason for this shift may relate to providers' increasingly disparate ability to offer participant services such as an interactive web site. Plan Sponsor reported results of the survey in its November 1999 issue.
"If it ain't broke, fix it till it is."
15. THE CASE FOR DIRECTED BROKERAGE: The same issue of Plan Sponsor contains an opinion piece from the principal of an institutional brokerage firm specializing in agency block trading for plan sponsors and investment advisors. Directed brokerage occurs when a plan sponsor directs that trades for its account be executed through specific brokers chosen by the sponsor working with its money managers and consultants. Unlike a soft dollar relationship (where the investment manager directs transactions to a broker in exchange for various services), the intent is to achieve cost control through recapture of a designated level of commission expense. A recent survey by the author's firm revealed that directed brokerages are employed by 73% of public funds and 68% of corporate plans that responded. The key steps for a plan sponsor to assess the potential of a directed brokerage program are (1) working with the custodian to examine and measure the plan's overall level of commission expense to get a handle on possible cost savings and evaluate if the potential benefit is worth the effort of implementation; (2) discussing viability of the program with investment managers and the consultant, since they will be key to successful design and execution; (3) making a judgment regarding whether the industry average of 25% to 50% of total commission recapture is realistic and represents real cost savings; and (4) cooperating with the consultant on design of a request-for-proposals to appropriate brokers. Above all, the broker selection process should be driven by due diligence, with assessment of: the quality of the firm's operations department, the form and extent of reporting, the time frame within which commission recapture payment is made, the firm's ability to handle directed brokerage in all asset classes, the firm's willingness to share specific examples of current directed brokerage assignments and the firm's willingness to sponsor on-site visits to learn more about its capabilities. Finally, once the program is up and running, ongoing monitoring is necessary to maintain a program that achieves initial objectives.
16. BLOOMBERG REPORTS ON PAY-TO-PLAY: In a report entitled "Wall Street Conflicts Erode Pensions," Bloomberg News talks about a veteran pension consultant who "blew the whistle" on his former employer, which had formed a strategic alliance with a company that provided investment management services to employee pension plans. The ex-consultant says he was instructed not to conduct an independent search for good money managers until the strategic alliance partner decided it didn't want to bid on the business. He was told to tilt the customer toward the partner's own business interests and present its products first. Further, the consultant set up "forums," where money managers paid $40,000.00 each for what was, in effect, a shot at talking to consultants like him, although the employer retorted that participants in its forums received "no advantage in our manager selection process." The piece also relates a story from Gary Findlay of another consultant who recommended money managers to a client only if they agreed to give him half their future management fees. Inasmuch as one manager's fees amounted to $1,000,000.00 a year, in addition to his $30,000.00 annual retainer fee, that consultant made half a million dollars from the manager! Any story on pay-to-play would hardly be complete without input from Mr. Findlay (see C&C Newsletter for October, 1999, Item 6), who is definitely "not for sale."
"Confession is good for the soul, but bad for your career."
17. FEDERAL LAW ENFORCEMENT OFFICER NOT INCLUDED UNDER FLORIDA'S BAKER ACT: Part I, Chapter 394, Florida Statutes, is the "Florida Mental Health Act" also known as "The Baker Act." Under the act, a person may be taken to a receiving facility for involuntary examination if there is reason to believe that he is mentally ill and because of that mental illness has refused voluntary examination or is unable to determine for himself whether examination is necessary. A law enforcement officer may initiate an involuntary examination, if he believes a person appears to meet the criteria for same, by taking that person into custody and delivering him to the nearest receiving facility for examination. The act provides that "law enforcement officer" is as defined in Section 943.10, Florida Statutes, which, our readers know in turn specifies that a law enforcement officer is a person employed full time by a municipality, the state or any political subdivision who is vested with authority to bear arms and make arrests and whose primary responsibility is prevention and detection of crime or the enforcement of penal, criminal, traffic or highway laws of the state. However, Part I, Chapter 23, Florida Statutes, the Florida Mutual Aid Act, does authorize state and local law enforcement agencies to enter into a Mutual Aid Agreement with a law enforcement agency of the United States to assist in enforcement of the Baker Act as provided by the terms of such agreement. AGO 99-68 (November 8, 1999).
18. FEDERAL DEBT CONTINUES TO DWINDLE: As has been the case for the past several years, fiscal news presented by the Treasury Department is extremely positive. The Treasury announced last month that the federal budget surplus for Fiscal Year 1999 was $123 Billion, the largest in history. This announcement follows the FY98 surplus of $75 Billion, and marks the first back-to-back surpluses since 1956-57. Remember that the FY92 budget deficit peaked at $290 Billion. In addition, the Treasury continues to use surpluses to pay down outstanding public debt. In FY98, debt was reduced by $51 Billion followed by FY99's pay down of $88 Billion. In fact, until recently, one of the fastest-growing segments of the federal debt has been interest paid on it! (In FY92 interest paid was $292 Billion, compared to FY99's $235 Billion payment.) The reason for this rosy financial picture is a decade of economic expansion, low inflation, decreasing expenditures and increasing tax revenues. For example, since 1992 there has been an increase of twenty million workers paying income taxes and FICA contributions. To facilitate its debt management task, the Treasury has announced it will issue a temporary rule allowing it to address the onerous original issues discount rules dealing with reopening of outstanding benchmark issues. Those rules make it difficult for dealers and investors to be involved in the municipal market, and with the spate of tax revenues, may no longer be necessary.
19. DEBTOR'S MANDATORY EMPLOYEE CONTRIBUTIONS TO PUBLIC DB PLAN MAY BE "DISPOSABLE INCOME" UNDER BANKRUPTCY CODE: In a proceeding under Chapter 13 of the Bankruptcy Code, a debtor is required to commit to a plan approved by the court under which he pays all of his "disposable income" earned during the period following bankruptcy filing to satisfy creditors' claims to the extent possible. Two recent bankruptcy court decisions have held that a public employee's mandatory contributions to his pension plan are not excluded from calculation of his "disposable income" available to pay creditors over the life of his Chapter 13 plan. Curiously, each decision acknowledged that prior cases had distinguished between mandatory employee contributions to a pension plan (which are not part of disposable income) and voluntary contributions (which are part of disposable income). Nevertheless, both courts concluded that the employee contributions were not really "mandatory" because they were not a condition of continued employment. The cases were reported on in the November 1999 NAPPA Report, by general counsel for the New York State Teachers' Retirement System, who questioned the soundness of the rulings -- as do we.
"If you think nobody cares, try missing a couple of payments."
20. TRUSTEES SHOULDN'T USE "BAD WORDS:" The same NAPPA Report contains a clever piece on problems occasioned by trustees' failure to recognize that public pension plans exist in political environments. Because even off-the-cuff comments by board members and staff are heard and repeated, they must consider every audience that will ultimately hear the message and the perspectives through which it will be filtered. Potential audiences include members, retirees, city councils/commissions, city executive staffs and citizens/taxpayers. Following is a list of "Bad Words" and the corresponding "Good Words:"
|Bad Words||Good Words|
Education/due diligence visits
Consumer Non-Durables A sector classification that includes securities of firms providing consumable products such as food and drugs.
Consumer Services A sector classification that includes securities of firms providing a service, rather than a product, to the consumer.
Convertible Security An obligation, including a bond, debenture or preferred stock, that may be exchanged for common stock -- usually in the same corporation. The terms that must be met to exercise this right of exchange are usually specified for each issue.
Core Style A strategy with investments in a large number of securities within a market capitalization range. Unlike an index strategy, a core strategy is not intended to exceed return of a target index.
Corporate Debt obligation issued by private corporations. The debt instrument varies greatly in quality and liquidity as terms of the obligation and financial health of the issuer are factored in by the market.
Correlation Coefficient A statistical measure of the degree to which the movements of two variables are related. A correlation of 1.0 indicates that the two variables move perfectly in tandem. A correlation of 0.0 indicates a random relationship between the variables. And a correlation of -1.0 indicates perfect tandem, but in opposite directions. Combining assets of different correlations can reduce total portfolio volatility.
Coupon The annual rate of interest that a bond issuer promises to pay the bondholder.
Currency Hedging Used by international managers to minimize the effect of currency fluctuation against the U.S. Dollar. A 100% hedge will neutralize the effect while a partial hedge will only reduce it.
Current Yield A bond's coupon rate divided by the bond's current price.